Credit Card Interchange Fees

Wednesday, October 25, 2006

A lesser-known member of the family of credit card fees is the “interchange fee.” These fees are what it costs merchants to process credit card transactions through VISA, Mastercard and American Express. Often characterized as a hidden sales tax, the fees average about 1.56% of the purchase price, according to the Federal Reserve (other studies say up to 1.75%).

Interchange fees have been shrouded in mystery, but VISA recently disclosed its complex pricing structure. [Download PDF of VISA fees document.] Mastercard plans do the same next week. The two large payment processing networks are under siege by retailers who have filed over 50 lawsuits against Mastercard and VISA and their card-issuing member banks. According to the merchant trade associations filing the lawsuits, interchange fees cost the average American household $232 per year.

According to merchants, these hidden fees are highest with rewards cards and corporate cards. Retailers pay a higher fee on a VISA Signature card, for example, than an ordinary VISA. American Express fees are higher than VISA or MC-branded cards.

Some retailers require a minimum purchase for credit card payments, which consumers should complain about as minimum purchase amounts are a violation of VISA and Mastercard member rules. In many states, including California, credit card surcharges by retailers are illegal, and consumers can sue in small claims court for triple damages.

Merchant lobbyists spin interchange fees as harmful to the consumer, but another point of view is that they can benefit consumers by subsidizing the rewards programs many cardholders now expect. One recent analysis found that credit card rewards now account for 44% of interchange fees because of the increased transactions on rewards cards. [Click here to read more.] So for cardholders who pay their balances in full each month, a proportion of the interchange fees are returned to the cardholder in rewards. When regulators in Australia capped interchange fees, card companies responded with fewer rewards programs and new annual fees, which prompted consumers to use debit cards instead. [Download PDF of Fed Reserve report addressing this issue.]

The most unfair aspect of interchange fees is that consumers who pay by cash or check wind up subsidizing consumers who make use of credit card rewards programs. If merchants increase their prices to compensate for the higher interchange fees on rewards cards, any increases are borne by cash and credit customers alike—with no direct benefit to the cash customer.

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